Owner-Operator Leases
You need to know the rules and need to be very careful in establishing lease practices and writing contracts.
Patricia Smith
Senior Editor
A trucking company that isn't a stickler for details when it comes to owner-operator lease contracts is probably asking for trouble. Over the last few years there have been numerous lawsuits focused on leasing practices and federal leasing rules. As far as "winners" and "losers," the scorecard is mixed: some wins for owner-operators, some for carriers, several out-of-court settlements.
But one thing is clear: Carriers that use independent contractors need to know the rules and need to be very careful in establishing lease practices and writing lease contracts.
The Truckload Carriers Assn.'s Truckload Academy recently launched a three-part audio conference series on owner-operator issues. Session One dealt with charge-backs, compensation and lease contract rules. Following are some cautions and tips offered by attorney Dan Barney of Scopelitis, Garvin, Light & Hanson.
Charge-Backs
Federal leasing regulations (47 CFR Part 376) dictate that the lease contract "shall clearly specify all items that may be initially paid for by the authorized carrier, but ultimately deducted from the lessor's compensation at the time of the payment or settlement, together with a recitation as to how the amount of each item is to be computed."
Barney noted that the rule does not forbid markups or administrative fees, but it does require full disclosure. Contracts should list items to be charged back and how the charges will be computed. If the contract specifies a lump sum amount, it should also specify if a markup or administrative fee is included.
Contracts should indicate if the carrier is getting volume discounts or rebates in conjunction with fuel purchasing programs for owner-operators. "You don't have to indicate the amount," he said, "but the fact should be there."
Carrier-sponsored purchasing programs for owner-operators must be optional, not required. This gets tricky with some administrative functions, such as fuel tax reporting, that many carriers prefer to handle for their contractors. If owner-operators aren't given the option to do it on their own, the carrier shouldn't charge an administrative fee, Barney cautioned. If a fee is charged, and the service isn't optional, it can be construed as a forced purchase and a violation of leasing rules.
The "forced purchase" also comes into play when the carrier requires owner-operators to buy certain types of satellite communications and to pay the use fees. Barney says it's important that the lease contract allow owner-operators to provide their own equipment as long as it's compatible with the carrier's system. The subscription fee should be disclosed in the lease and, again to fend off forced purchase complaints, there should be no markup or administrative fee.
Barney advised carriers to list all possible charge-backs or deductions, avoiding vague statements such as "all other amounts that the contractor owes to the carrier." He also recommended a general statement clarifying that there will be no mark-ups or added fees, "unless specified," and that all discounts and credits will be retained by the carrier "unless specifically noted otherwise."
The rules say that leases must "clearly specify the conditions under which deductions for cargo or property damage may be made from the lessor's settlements" and must further specify "that the authorized carrier must provide the lessor with a written explanation and itemization of any deductions for cargo or property damage made from any compensation of money owed to the lessor. The written explanation and itemization must be delivered to the lessor before any deductions are made."
When the Interstate Commerce Commission wrote the regulations, it essentially decided to place the risk of cargo claims with the carriers, Barney explained. Thus carriers can't charge owner-operators an amount they think the claimant will settle for. They must wait until a claim has actually been paid before deducting it from the owner-operator's settlement or escrow.
Any changes in charge-backs or deductions should be documented with a contract addendum signed by both parties. To save time, some carriers use a "negative option approach." They notify owner-operators that a change will be effective on a certain date unless the owner-operator objects. Barney said that can work, but notification needs to be worded carefully so it doesn't take away contractor rights under the regulations. And if the negative approach is used, all parties should have the right to terminate the contract at any time, for any reason, with minimal notice. Otherwise, it will look like the carrier is forcing a contract change without the owner-operator's approval.
Compensation
The rules don't dictate how much carriers should pay contractors or what type of compensation method they should use; but whatever is agreed on "shall be clearly stated on the face of the lease or in an addendum which is attached to the lease."
Many of the lawsuits have been brought by owner-operators paid a percentage of gross revenue, and many of these cases focus on definition of "revenue" or "gross revenue." For instance, "X percent of gross revenue" may be interpreted to mean that the owner-operator's share will be computed on everything collected from the shipper when, in fact, the carrier intends to deduct accessorial fees and payment processing charges before calculating the owner-operator's percentage. Barney instead recommended that carriers use "adjusted gross revenue" with an accompanying definition including a list of items to be deducted before the contractor's percentage is applied.
When a contractor's revenue is based on a percentage of gross revenue the regulations say that "the lease must specify that the authorized carrier will give the lessor, before or at the time of settlement, a copy of the rated freight bill or a computer-generated document containing the same information, or, in the case of contract carriers, any other form of documentation actually used for a shipment containing the same information that would appear on a rated freight bill."
When computer generated documents are used, the lease must permit contractors to view, during normal business hours, copies of actual documents. Regardless of the type of payment, contractors must be given access to the carrier's tariff or contracts - but only portions of contracts pertaining to rates. Names of shippers and consignees can be deleted.
If owner-operators are paid on a per-mile basis, the contract needs to spell out "in great detail," how the different types of miles (loaded or empty) will be treated, Barney said. Keep in mind that most judges and jurors aren't going to be familiar with trucking terms, so definitions should be included. Example: "under carrier dispatch" might be defined as "specifically directed or authorized by the carrier." Be sure to specify the basis for mileage calculations - odometer miles, for instance, or a specific mileage guide.
Leasing rules require that contracts "specify that payment to the lessor shall be made within 15 days after submission of the necessary delivery documents and other paperwork concerning a trip in the service of the authorized carriers." That paperwork must be limited to log books required by DOT and documents necessary for the carrier to secure payment from the shipper.
One area that carriers need to consider carefully is payment for services not compensated by the shipper. The contract must "clearly specify" who is responsible for the cost of fuel, fuel taxes, empty mileage, permits of all types, tolls, ferries, detention and accessorial services, base plates and licenses.
It must also specify who is responsible for loading and unloading as well as compensation, if any, to be paid for the service. But the rules are not clear as to whether or not that compensation can be based on what is actually collected from the customer.
Barney said the ICC ordinarily held that the carrier must pay contractors an amount based on what was billed the customer. If, after a reasonable amount of time, the charges couldn't be collected, the carrier could charge back the contractor a pro rated share. "That's not a very popular approach," he added.
One area of concern is detention charges, which can be difficult to collect. Barney said there will likely be challenges to payments based on what's collected versus what's billed. If carriers choose that route, it should be made clear in the contract. He also suggested that owner-operators be required to get a signed detention statement for the shipper or consignee in order to collect detention charges from the carrier. That places some burden on the owner-operator and helps assure that the carrier will be able to collect from the shipper.
Audio tapes of the conference, along with handout materials, can be found in the "products" section of www.truckload.org or by calling (800) 775-7654. Ask for "Navigational Tools for Working with Owner Operators. Session I: Charge-Backs, Fuel and Compensation."
Session II of the series, "Lease-Purchase Agreements and Escrow Funds," will be held Sept. 23. Session III, "Insurance and Indemnification" will be Nov. 19. For details, call Virginia DeRoze at (703) 838-1950.
